Dispatches from the 10th Crusade

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He suggests that “the China-US seesaw is about to swing the other way. Offshoring is out, ‘re-inshoring’ is the new fashion.” He cites a report, “Made in America, Again” out of Boston that alleged “Chinese wage inflation running at 16pc a year for a decade has closed much of the cost gap.” Nothing to sneeze at. Labor’s comparative advantage switches rapidly. Indeed, “China is no longer” what we might call “the default location” for firms seeking “cheap plants” to supply the US.

Such industries as “computers, electrical equipment, machinery, autos and motor parts, plastics and rubber, fabricated metals, and even furniture” approach a “tipping point.” The evidence: the “gap” (economist-speak) “in productivity-adjusted wages” for China “will narrow from 22pc of US levels in 2005 to 43pc (61pc for the US South) by 2015.” What’s more, “shipping costs, reliability woes, technology piracy” conduce to an state of affairs where “advantage shifts back to the US.”

Should that prediction come true, we can thank Ben Bernanke and his helicopters for the revival of American manufacturing industry. The dollar fell against the yen to a record low today. This indicates that, especially in Asia, companies selling from dollars into Asian markets are benefited, ceteris paribus, by the currency environment.

The list of “repatriates” is growing. Farouk Systems is bringing back assembly of hair dryers to Texas after counterfeiting problems; ET Water Systems has switched its irrigation products to California; Master Lock is returning to Milwaukee, and NCR is bringing back its ATM output to Georgia. NatLabs is coming home to Florida.

One consistent point of my amateur analysis of world political economy since the shock and crash of 2008 may be summed up as a spellbound awe at the capacity of fact to lay waste to theory. Facts are pulverizing; human predictions are easily ground to bits. Perhaps this weak-dollar trend will reverse and labor parity vanish from discourse. But if it does not, we’re in for some theory-busting facts to roll through this place. We could devalue our way out of this debt mess; and then check that risk by emancipating the ingenuity of America to exploit the valuable resources right under our noses, which we’ve only begun to discover. Look at the facts, again:

“The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d),” said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea. Total US shale output is “set to expand dramatically” as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009.

So there is a positive policy toward recovery: weak-dollar and a natural-resource boom. We’ll grow out of this usury crisis: we'll do it by empowering our merchants, particularly our energy merchants. I offer it in that spirit of skepticism that I have indicated behooves us regarding all predictions which ground policies.

Comments (58)

While it is good news that some mfg. is returning, the jobs returning seem to be at significally lower wages than before. Someone pointed out that Hoover was returning a plant to the US and that wages were going to be $7.50/hr down from the $20/hr at the previous plant. Some are going to rightly point out that the average worker has lost all leverage when a company can just move at will for wage arbitrage.

Don't take this to mean I support the NLRB in the Boeing case or that I think companies should be held hostage by labor unions. But, there is a point to be made that the playing field is not level when companies can just up and leave at any time. (This doesn't have to do with intra-US moves, I'm talking moves between countries.)

It's actually rather ironic that a cheap dollar policy continues to be called a "weak dollar" policy. Over the last few years, I think almost every country has had a "weak currency" policy -- weak dollar, weak yuan, even the Swiss franc is no longer being allowed to rise in value relative to the euro.

Which are the most prominent examples of countries that have had an "expensive currency" policy lately? How about Portugal, Ireland, Italy, Greece, and Spain? They adopted the euro, which was far more expensive than their old currencies. Most of the former communist countries didn't adopt the euro and are now glad they didn't.

It's a historic shift, and seems to get little attention from the commentariat.

We entered our usury crisis because there was nothing good, that is, truly profitable, to invest money in. As such, we have been throwing money into silly ventures and baseless bubbles.

I know that Masterlock's returning to Milwaukee was something of a coup for Governor Walker and his tort reforms, tax policy, and governmental reforms. I do so love it when our local lefties get rehearsal in wailing and teeth gnashing.

Someone pointed out that Hoover was returning a plant to the US and that wages were going to be $7.50/hr down from the $20/hr at the previous plant. Some are going to rightly point out that the average worker has lost all leverage when a company can just move at will for wage arbitrage.

What jobs are they doing for $7.50? Sounds like final assembly to me. I have no problem with that. Putting together a vacuum cleaner isn't a minimally skilled position. The real test is whether or not the people responsible for controlling the fabrication of the parts are paid any better.

Which are the most prominent examples of countries that have had an "expensive currency" policy lately? How about Portugal, Ireland, Italy, Greece, and Spain? They adopted the euro, which was far more expensive than their old currencies. Most of the former communist countries didn't adopt the euro and are now glad they didn't.

Another perspective is to say that the PIIGS got into trouble because they over-consume and under-produce. The euro nations could easily resolve their imbalances by moving gold bullion opposite the flow of excess goods and services. Except that the dollar reserve system keeps the price of gold bullion many, many times below its actual value so Greece isn't about to ship its gold reserves for pennies. What you end up with are endless summits giving way to a mix of haircuts, austerity and bailouts; basically delay tactics to keep the eurozone functioning nominally until the dollar reserve system collapses of its own accord, under the weight of hundreds of trillions in debt and derivatives.

The climax to this story hasn't arrived yet, when it does then we can judge the wisdom of the euro architects.

We entered our usury crisis because there was nothing good, that is, truly profitable, to invest money in.

If that is really true, (which I take with a grain of salt), then the only possible explanation for this state of affairs is a truly degraded moral condition for the people - both individually and as communities. If people aren't utterly degraded, then unemployed people with ideas can easily be matched up with capital, and away we go with wealth-production. That this doesn't happen means (a) unemployed people are lazy, unthinking, on drugs, unmotivated to try something new, unwilling to be responsible for their own productivity even in part, and stymied by too many hurdles to think success might even be possible; and (b) putting venture capital into someone's hands has too many obstacles to yield a likely harvest, either because of over-regulation, or damaged social stock (like, trust in good behavior of fellow citizens: e.g. companies that patent inventions and then sit on them solely to avoid manufacturers lawsuits, or frivolous aggravation lawsuits), corruption, or other clear systemic diseases of the body politic. For these underlying reasons, I have real doubts that a return of some overseas jobs really will "turn" America around in any truly important way. It sounds just like more of the boom-and-bust cycle all over again.

Getting all Zimbabwe on the dollar is certainly the way to steal more substance from ordinary working folk. Billionaire usurers, if there were such creatures, would be as affected as any pawn shop ever is.

What jobs are they doing for $7.50? Sounds like final assembly to me. I have no problem with that. Putting together a vacuum cleaner isn't a minimally skilled position. The real test is whether or not the people responsible for controlling the fabrication of the parts are paid any better.

Mike, I am not at all in favor of the American 60's to 90's union-style of benefits gathering, which never seemed to have any attempt to place worker benefits in relation to overall company or industry viability (seemed that way to me, anyway). Nevertheless, I have to ask you something: If workers in assembly-line plants in the 1950's were putting together vacuums (i.e. final assembly), and supporting a family on that job, what is it today about final assembly of vacuums that makes it unsuited to the level of a family bread-winner? Sure as heck $7.50 / h won't support even a single person, much less a man and wife (not to even mention kids). Is there something different about final assembly now that is beneath the intelligence, industriousness, and dignity of a family man now?

The problem, as I see it, is that our view has been altered: because robots can do a fair amount of mindless assembly work, ALL of that work is now viewed as dead-end work only suited to dead-end people: high school drop outs, for example. But the work itself didn't change, the people did. Although there are at least 50% more quality jobs around now than in 1950, jobs that don't involve blue collar type work, there are WAY more people who need those better paying jobs than there are better jobs. Which is the root problem: people unsuited to the jobs that ARE there, or wages unsuited to the people who need to support families?

However in these times deflation worries me more. The weight of our debts is crushing us. Before 2008 it was primarily private debts (corporate and individual); since then it has been public debts.

In the absence of inflation, these debts are gaining value, relatively, against current purchasing power. Whether we are truly experiencing a want of inflation is an interesting question, of course; the supererogatory complexity of digitally-integrated world capital markets permits one to suspect that both inflationary and deflationary pressures are extant at the same time. But in my judgment, here in America (and certainly in Europe) the balance of forces favors deflation. Frightened economic actors, overly-indebted households and institutions, are by and large inclined to retrieve capital out of active commercial markets, preferring instead to store it as cash or short-term assets and protect its value. Newly created money thus mostly fails to enter the economy in active trading: its lies dormant or is extinguished in the paying down of debts.

The stupefying intervention of government into private markets since the 2007-08 crisis is hardly immaterial in this environment of deleveraging. Again, I'm talking about a relatively more deflationary milieu. But between fiscal expenditures and three years of heavy monetary easing, it makes sense that the dollar would be weaker. Look at a five-year graph of the dollar against the Swiss franc. That's one f the reasons why the Asian advantage in labor costs is evaporating. (Another lies in the increase in American labor productivity.)

All that said, the dangers of serious inflation should not be denigrated. I share my father's concern. These things can shift in a real hurry. If that excess money came pouring off the sidelines all at once, we could have a real currency crisis on our hands. Some at the Fed appear to believe they have the tools to contain such a crisis; I'd rather not put their belief to the test. Human psychology cannot be mastered by any technique we here below possess.

If that excess money came pouring off the sidelines all at once, we could have a real currency crisis on our hands.

Exactly. If I pull the money out of my (figurative) mattress and use it to try to buy the house next door, it really does have less value because of the inflation that has been taking place. This is a point that occurred to me the last time we had this discussion here.

Therefore, deliberate inflation (helicopters, yet!) *as policy* is not such a brilliant idea.

Which is the root problem: people unsuited to the jobs that ARE there, or wages unsuited to the people who need to support families?

Tony, I fear that here we're going to come up against a fundamental difference between one approach to economics and another. Namely, I think this is just a strange question. It gives the appearance of an assumption that wages can (and perhaps should) be _forced_ to achieve x level on the grounds that a given worker applying for a given job is in a particular social situation and hence needs more money. This seems to me, to put it at its mildest, an obviously false assumption. It seems to take what may be a tragedy or an unfortunate situation and turn it into some sort of indictment of others: Joe is not terribly bright but is a wonderful man, not a loser at all, a hard worker, and needs to support his family doing something in the zone of assembling vacuum cleaners. Assembling vacuum cleaners doesn't pay enough for Joe to do so. Therefore there's something wrong with the entire economy, or at least with the vacuum cleaner industry, because assembling vacuum cleaners _should_ (in some sense or other of "should") pay enough for Joe to support his family by doing it.

To me, that's just a strange way of looking at it, even though I have a pretty strong sense of the unfortunateness of Joe's position. I just have no intuition whatsoever that connects--in some ethically binding way--assembling vacuum cleaners with making enough money to support one's family.

If I pull the money out of my (figurative) mattress and use it to try to buy the house next door, it really does have less value because of the inflation that has been taking place.

Not necessarily. If all your neighbors are jamming their money into their mattresses at the same time you're buying the house, your currency may have relatively greater value.

And what if you take the money out of your mattress to pay off your mortgage five years early? Now the bank has a pile of currency when what it really wanted was the steady revenue stream of your premium and interest payments for five more years. The bank doesn't even get a deposit out of the early repayment. So maybe a portion of currency sits in the bank vault, but a larger portion probably ends up back on reserve at the Fed. Or again, what if you use the money to refinance to a lower rate? Now the bank still retains a revenue stream from you, but a diminished one. Its balance sheet is still weakened. A businessman who was about to get a loan is instead told, "sorry, we can't help you."

I seem to recall when this subject came up before, the Masked Chicken (whom we haven't seen around here in a while, sad to say) asked what deleveraging is and how we can force people to start leveraging again. That was humor, but I'm afraid, Paul, it almost sounds to me like you would take it more seriously--as if by paying off one's mortgage early and getting oneself out of debt (which I would call getting one's house in order, fiscally) one is harming the economy by preventing the bank from having that "income stream" to loan to the businessman!

Maybe if I had the money _I_ would loan it to the businessman--directly or indirectly.

There is something very odd and, dare I say it, Keynesian-sounding about this idea that we're all better off if people are in debt and being gradually milked of interest by the banks.

As far as I'm concerned, if that's the position we're in, then something _else_ must be wrong. People would get the money out of their mattresses fast enough and invest it in investments that showed promise of actual return if there were such investments readily available to them without gigantic risk--i.e., if the economy were healthier generally. This isn't just a matter of "famous for being famous"--as if it were all a matter of psychology and trying to convince, or pressure, people to start "leveraging" again (i.e., borrow money).

Something just strikes me as cockeyed about this whole approach to the economy.

Mike, I am not at all in favor of the American 60's to 90's union-style of benefits gathering, which never seemed to have any attempt to place worker benefits in relation to overall company or industry viability (seemed that way to me, anyway). Nevertheless, I have to ask you something: If workers in assembly-line plants in the 1950's were putting together vacuums (i.e. final assembly), and supporting a family on that job, what is it today about final assembly of vacuums that makes it unsuited to the level of a family bread-winner? Sure as heck $7.50 / h won't support even a single person, much less a man and wife (not to even mention kids). Is there something different about final assembly now that is beneath the intelligence, industriousness, and dignity of a family man now?

There are a few factors that are different now:

1. It is now normal for women to work instead of marrying young. Conservatives have to face up to the fact that it is not economically feasible to raise the average wage of working men while taking a libertarian stance on female involvement in the economy. It is a basic economic fact that when you radically increase supply of anything, price plummets.
2. The world has recovered from WWII and those American factories now have many competitors around the world. The post-WWII moment when every Tom, Dick and Harry could enjoy what used to be a middle class lifestyle by just showing up with a bit of a work ethic is gone.

The problem, as I see it, is that our view has been altered: because robots can do a fair amount of mindless assembly work, ALL of that work is now viewed as dead-end work only suited to dead-end people: high school drop outs, for example. But the work itself didn't change, the people did. Although there are at least 50% more quality jobs around now than in 1950, jobs that don't involve blue collar type work, there are WAY more people who need those better paying jobs than there are better jobs. Which is the root problem: people unsuited to the jobs that ARE there, or wages unsuited to the people who need to support families?

You're putting the cart in front of the horse here. A lot of automation happened as a result of unrealistic demands by labor to maintain the post-WWII moment via contracts and regulations. The attitudes of a lot of Americans, especially the Baby Boomers, contributed to this. Most of the OWS outrage is simply frustration that they'll have to go back to the quality of life that was normal for Americans relative to the rest of the world that was the norm from 1776-1939.

Any argument about quality of life that is based on the standards of the post-WWII moment is automatically an unrealistic argument.

Lydia, what we're running into here is what's known as the "paradox of thrift," which is generally thought to be of Keynesian origin but has clear antecedents in his predecessors.

as if by paying off one's mortgage early and getting oneself out of debt (which I would call getting one's house in order, fiscally) one is harming the economy

It might just be that it is harming the economy, despite its utility and wisdom from the perspective of the individual mortgagee. I don't care much about the bank's balance sheet; it's the banker's business, not mine. I refinanced my own mortgage not long ago, and have considered doing it again.

But the fact remains that in aggregate these actions are deflationary. And in my judgment deflationary pressures are strong enough today to decisively offset the inflationary monetary and fiscal policies that policymakers have pursued.

I'm confused by something you said in an earlier comment. You say our debt load is crushing us, that is, getting harder to pay down. You also say in the same comment that the debt is gaining in value relative to purchasing power. If the obligations of debt instruments are becoming less likely to be honored, then how does the value of that debt increase?

I'm saying that one of the most pernicious aspect of deflation is that it causes debts to grow increasingly burdensome. Contrariwise, inflation causes debts to be less burdensome, which is why currency devaluation is the traditional policy for getting out from under crushing debt -- it's what Greece would do now if she had maintained sovereignty over her currency. As John's insightful comment upthread mentioned, the decision to adopt a dearer currency has been ruinous for heavily-indebted nations.

If debt instruments are indeed becoming less likely to be honored, that's going to reduce the value of the debt securities and increase their interest rate, which is exactly what's happening in Italy right now. Italian bond spreads have widened dramatically. The interest rate is the borrowing cost for the borrower (which is rising), while the debt security's price (which is falling) concerns its value for trade on a secondary market.

Any argument about quality of life that is based on the standards of the post-WWII moment is automatically an unrealistic argument.

Mike, You might be right about that, but I cannot imagine a rationale for the unreasonableness of a sustained 1955 standard of living unless in 1955 America was essentially living off the largess of the rest of the world living at a much lower level. I don't get the impression that's the cause of a 1955 standard of living being unsustainable.

Granted that the price of labor had to go down with women entering the work force. That should have (also) driven the price of products down in similar fashion, because of the cost of labor dropping. This should not, by itself, cause a drop in the standard of living (measured in economic "what can I buy with household income", not in terms of "what emotional impact does it have on Johnny that his mom isn't home when he comes home from school.") In total terms, extra work hands should increase total wealth, not just re-arrange who has it.

I agree also that American factories now have global competition. I don't quite see how that answers the question of whether the perceived problem of not enough jobs (here) to support a family man is due to the supply of jobs or to the men who need such jobs. Are you saying that we simply cannot cater to a notion of good jobs paying a family wage anymore even if we want to? That would seem to answer the question by saying the problem is in the men seeking the jobs, they just have to aim lower, at jobs that only support half a family (and barely, at that), because that's what the economy now means by "good" jobs. I submit that this would be, perforce, a deranged economy, a system we ought to decry as being inhuman.

Namely, I think this is just a strange question. It gives the appearance of an assumption that wages can (and perhaps should) be _forced_ to achieve x level on the grounds that a given worker applying for a given job is in a particular social situation and hence needs more money.

Lydia, I actually agree with you. I was not trying to make prescriptive proposal in the least, only a descriptive comment: there are more people wanting and capable of doing good jobs than there are good jobs. This is necessarily a _problem_ situation in anyone's economy. My question isn't about whether employers are being unjust to anyone individually or collectively, it is more general: is the problem in the economy properly to be understood as an _excess_ supply of labor, or a deficient supply of jobs (suited to those potential laborers), for example?

Prescriptively, I would NEVER suggest that wages should be forced to meet a standard independent of the employer's capacity to develop and sell a product with that labor. I don't have a suggestion as to a large-scale solution to a mis-match in the number of jobs that pay a family wage vs number of potential laborers who legitimately seek (and are willing to work) such jobs. Small-scale, my only "prescriptive" idea is that a good employer would not only ask his employee what job he wants to do right now (that serves the employer's current needs), but also ask him what job he eventually hopes to move into that is commensurate with his personal / family obligations, and encourage the employee to obtain the skills for that job. That is, a true employer-employee relationship is a collaborative effort to enable the employer to plan for a future with an employee who increases his capacity to generate wealth at the same time the employee plans for a future in which he becomes more valuable to his employer when his personal needs expand. In this, being a good laborer / employee means taking personal responsibility for positioning oneself to grasp the capabilities that are more useful to an employer, if one wants to make more money.

Matt, something is very much wrong -- it is that we have a high finance sector absolutely dependent on the trade in an enormous variety of debt instruments, of ever-increasing abstraction from actual productive activity. This is why I call our difficulties the "usury crisis."

One might rephrase it thusly: paying down debts and saving money is bad for high finance; since high finance counts for an enormous chunk of business profits, it is therefore bad for the private economy as a whole.

Mike, You might be right about that, but I cannot imagine a rationale for the unreasonableness of a sustained 1955 standard of living unless in 1955 America was essentially living off the largess of the rest of the world living at a much lower level. I don't get the impression that's the cause of a 1955 standard of living being unsustainable.

In 1955 America was the only major industrial producer on the world stage because most of the world was still recovering from terrible carnage inflicted on it during WWII. Most of our near competitors could barely put up a competitive fight in the world economy.

Granted that the price of labor had to go down with women entering the work force. That should have (also) driven the price of products down in similar fashion, because of the cost of labor dropping. This should not, by itself, cause a drop in the standard of living (measured in economic "what can I buy with household income", not in terms of "what emotional impact does it have on Johnny that his mom isn't home when he comes home from school.") In total terms, extra work hands should increase total wealth, not just re-arrange who has it.

You're excluding land and housing prices which are the most significant single expense most families have. As the population increases, the demand for land and housing will only increase; it is a finite good until we can reliably ship surplus population to space colonies where they can have as much land as they can productively use. An increase in demand for land coupled with cratering wages caused by 20-30m+ new competitors in the labor market (as the female middle class entered the workforce) would have a terrible impact on the finances of most families.

I agree also that American factories now have global competition. I don't quite see how that answers the question of whether the perceived problem of not enough jobs (here) to support a family man is due to the supply of jobs or to the men who need such jobs. Are you saying that we simply cannot cater to a notion of good jobs paying a family wage anymore even if we want to? That would seem to answer the question by saying the problem is in the men seeking the jobs, they just have to aim lower, at jobs that only support half a family (and barely, at that), because that's what the economy now means by "good" jobs. I submit that this would be, perforce, a deranged economy, a system we ought to decry as being inhuman.

Americans aren't willing to make the changes necessary. The first thing that would be required would be to get ahold of our monetary policy. The second would be radical reforms to the entitlement programs and regulatory apparatus around health care (on many fronts from tort reform, to transparency in pricing, to how medical schools are established and acredited). At the very end, it would require Americans to be willing to spend $3,000 for a TV that costs $1,000 now in order to ensure that the TV is made in compliance with American labor and environmental standards.

I submit that a large majority of Americans, faced with the reality of many products going back up would never pay the prices. They'd rather have a cheap TV than know the workers making it got a living wage and the environment wasn't harmed in the process.

The South Park Episode where they hunt for the "Heart of Wal-Mart" is a very good exploration of this issue.

Granted that the price of labor had to go down with women entering the work force. That should have (also) driven the price of products down in similar fashion, because of the cost of labor dropping.

Tony, even though I know there is a quiet eye-roll (not necessarily yours) that probably takes place when I bring this up, every once in a while it just seems too apropos to overlook: The reason that that natural set of effects does not take place is because the amount of money in our system is not fixed. The government is specifically _tasked_ to keep prices from falling "too much." Hence, money will be created ex nihilo to offset any such effect of women's entering the workforce. The reason that inflation has taken place with women's entering the workforce is not that that is a necessary effect of women's working. It's that the government has continued to print money to "keep up with" that and other phenomena.

Paul, as so often happens, I find my head spinning a little. On the one hand, your reply to Matt and me is that somehow the bad-guy finance sector is to blame for the paradox of thrift--for the badness to the economy caused by people's paying off their debts. On the other hand, you seem to want them _not_ to pay off their debts, and you seem to think that the government is actually doing something wise by pouring newly created dollars into the economy to make up for that supposedly bad effect.

Surely there's something strange about this. To me it looks like giving a junkie more and more of the drug to keep him from having to go through withdrawal, even though you're killing him by means of the drug.

What I observe and what I desire are two different things. I observe that we are possessed of an economy that for years has been dependent on the lucrative trade in debt instruments, more precisely the expansion and sophisticated development of credit intermediation -- the basic business model of banking -- into virtually every industry and sector. Thus we had our largest industrial firm, General Electric, gradually turning into a huge shadow bank with ancillary industry operations. Thus we had the Federal Reserve, under the press of necessity, extending its role of lender of last resort to support short-term funding for companies like Harley Davidson and McDonalds, the farthest thing from banks. Thus we have a single AIG outfit in London exposing itself to losses sufficient to bankrupt every other unit of the company, and a host of other interrelated companies as well.

somehow the bad-guy finance sector is to blame for the paradox of thrift

I did not say that. In fact I said that the paradox antedates modern economics. La Wik says it can be dated from the early 18th century. Even under hard currency conditions, lots of folks hoarding gold will cause a spike in the value of whatever gold remains in circulation. (It's a puzzle to me why anyone should suppose gold has some kind of absolute value, rather than a price that fluctuates with supply and demand and other factors like any other commodity.)

What I desire is a healthier financial sector: finance that serves production and industry rather than driving it. How to get back to that is the question behind all of my writings on this subject.

I also think we have to be very careful not to conflate different things. For instance "newly created dollars" are not the same as "newly created debt instruments." I think Moldbug is definitely onto something when he refers to currency as "sovereign equity." A dollar is more like an ownership share in the US government than a debt instrument. It can be diluted just like any stock can, with new issuance, but printing new money is not at all the same thing as selling new Treasury notes and bonds.

You're excluding land and housing prices which are the most significant single expense most families have. As the population increases, the demand for land and housing will only increase; it is a finite good until we can reliably ship surplus population to space colonies where they can have as much land as they can productively use.

Mike, you're right I did not count that factor. That's one of the reasons I think we need to colonize space, at least in the form of floating space station colonies. One of the many reasons.

Americans aren't willing to make the changes necessary. The first thing that would be required would be to get ahold of our monetary policy. The second would be radical reforms to the entitlement programs and regulatory apparatus around health care (on many fronts from tort reform, to transparency in pricing, to how medical schools are established and acredited). At the very end, it would require Americans to be willing to spend $3,000 for a TV that costs $1,000 now in order to ensure that the TV is made in compliance with American labor and environmental standards.

The "changes necessary" in order to achieve a specific end goal, you mean. I am back 4 turns behind you, still trying to figure out what specific end goal X is that we actually think is both something we WANT and that is conceptually possible (even theoretically, in a sound society, not yet asking for practically and politically feasible). For example, some people propose that we throw away the antiquated notion that women have "entered" the work force and that this must be accounted for: they ARE HERE, they going to stay in the work force, and the only question is how to structure an economy that has room for them (so they say). I think that this proposal assumes that we want most women to stay in the work force, and I am not willing to assume that for the sake of the discussion, even though I may end up there when we finally get to pragmatic and practical approaches. Has anyone bothered to work out the economic costs of (a) paying someone else to do day care, (b) the costs of mental and emotional ill health from disturbed family structure, (c) child delinquency and resultant net loss from high-school sludges who cannot work in a real job and have to be carried by society; (d) the increased costs of marriages broken up because the stresses on marriage from 2-worker families, etc? Just on economic terms, it may be that the 2-worker family isn't really benefiting society much.

Likewise, I am willing to consider conceptual scenarios that include prices of some commodities going up by large factors, but I am more interested in the mechanisms by which we determine the "necessary" steps that result in this really are necessary to that end goal of X. Surely tort reform would end up reducing costs of many goods and services, not increasing them. But I think it needs doing not primarily because its impact on pricing, but because of the negative effect the tort muddle has on human creativity and productivity. (By the way, along with fixing the medical schools we would have to fix the law schools to achieve the right _kind_ of tort reform, because half the problem is lawyers and judges with the wrong attitude about law and order.)

The reason that that natural set of effects does not take place is because the amount of money in our system is not fixed.

Lydia, you are right, I was speaking in a "all other things being equal" sense, and even in that sense I was leaving out that we have a fixed amount of land and it does not increase no matter who is working.

Although I am extremely wary of a government that can just print more money, I don't think of the power as inherently disordered for a government. When someone invents a use for a fungus by-product (i.e. penicillin) and starts making it, there is, all of a sudden, new wealth in the system that didn't used to be there. If you don't print more money, then the price of everything else has to go down to accommodate the new product. The cost of 5 pounds of potatoes goes from $4 to $3. This have the unjust effect that loans would be paid off in dollars that are now worth more: the banker who yesterday could buy 25 pounds of potatoes with my $100 dollar loan payment now can buy 33 pounds with my $100 loan payment. Only by adjusting the money supply to reflect the increase in wealth can you avoid the disturbance to the economy-wide change in values as your added new wealth modifies the relative value of everything else.

It's a puzzle to me why anyone should suppose gold has some kind of absolute value, rather than a price that fluctuates with supply and demand and other factors like any other commodity.

It's a puzzle to me why you think that lots of people think that. Certainly the hard-money advocates I've read don't.

Tony,

Only by adjusting the money supply to reflect the increase in wealth can you avoid the disturbance to the economy-wide change in values as your added new wealth modifies the relative value of everything else.

The idea that government can figure out what new wealth has been added to the system and add *just that* amount of money to the system seems to me to have been roundly, soundly, and decisively disproven by history, if history can be said to disprove anything.

There absolutely must be a better way to deal with debt repayment under conditions of deflation than by the use of a fiat currency having no relation to any fixed entity whatsoever, giving the illusion of creation ex nihilo. That illusion is indeed inherently disordered, and precisely because completely untethered fiat currency gives the illusion, it seems to me to be disordered as well, leading precisely to the situation we are currently in--just trying to kick the debt can down the road long enough so that a given generation of planners can all die and not actually have to see the next crash that comes or find out how hard it actually is. It's like an addiction, and God (literally) only knows if the patient will survive or will die of the effects of the drug or of withdrawal when the drug runs out.

Btw, Tony, I completely agree with you in not simply "accepting" women's large-scale presence in the workforce. And of course it's a vicious cycle; many women now either think they have to go to work or actually do have to just to help their husbands keep their families fed.

I would suggest to you that insofar as monetary policy "locks in" past social revolutions of this sort and makes it difficult or impossible to go back because of both price inflation and lower wages (due to higher supply of workers), our present monetary policy is on the side of the feminists, though to some extent unintentionally. A thought.

I'll say this much, Tony: Pure consumer debt shouldn't be taken on anyway. People who simply live beyond their means on debt are not being responsible. As for investment capital debt or responsible, fixed-rate mortgages with the home as collateral, that always involves, in a sense, a "bet" that your business will be one of the ones producing the new wealth in the system so that you won't be one of the ones having trouble paying off the debt. (Or that your job will continue so that you can continue to pay your mortgage.) Naturally, those sorts of bets are sometimes losers, but the whole game in taking debt is to try to predict what is going to happen during the debt-repayment period.

One possible solution for people who doubt their own ability to predict deflationary scenarios would be some sort of debt-repayment insurance or deflation insurance, the cost of it built into the initial cost of the debt, allowing for a softer landing for the debtor if he happens to be one of the losers in some later economic situation, to such an extent that he cannot repay his debt.

by the use of a fiat currency having no relation to any fixed entity whatsoever

Lydia, why do you suppose that gold is a fixed entity? In the same comment you dismissed my puzzlement that someone might think that.

The idea that the sum total of gold has been pulled from the earth is comparable to the idea that the sum total of oil has been pulled form the earth. Supply can and will increase.

In a booming economy, more gold will be found to meet demand. Probably not enough gold to, as Tony says, "reflect the increase in wealth"; and the subsequent deflation will put an end to the boom; but this notion of metallic fixity is nonsense on stilts. Hell, one of the normal ways for an investor today to gain exposure to gold is precisely to purchase the stocks of companies that mine precious metals. This because when gold is dear the profit in pulling it out of the earth increases.

Gold's value, like everything else in human economies, rests in the end on human psychology.

It is perfectly plausible that something else might replace gold as the standardized storehouse of value. My view is that over the past couple generations the dollar has performed that function. This reserve currency status is a huge benefit to Americans, which is another reason why I endorse my dad's worries about inflation.

Perhaps I should have said "real entity." That would better have reflected my meaning. By "supply and demand" originally I took you to mean selling and buying rather than mining. Of course you are quite right about mining.

But even the contingencies of the supply of some commodity that must be found and dug up would provide a reality check and a limitation to growth in supply that is hardly even remotely, even nominally, provided by a "commodity" that can literally be produced at human will (that is, the will of certain special humans in a special legal position). I'll wager nobody ever even thought of using a phrase like "creation ex nihilo" for strongly commodity-connected currency as a medium of exchange. That this is the appearance of pure fiat currency can't plausibly be denied. No doubt people will try to find a way to say that that's not what it really is, but that's sure as heck what it looks like, and that fact in itself is an important one.

Gold's value, like everything else in human economies, rests in the end on human psychology.

Right. If someone proved that gold were the cause of cancer, then gold value would plummet to near 0.

However, what about water? Pure, clean water?

Or, how about oxygen (think: on the moon, or in a space habitat)? Whatever else is the case, oxygen is never going to be found to be an illusion in value. Nor will water. It just so happens that here on Earth, they happen to be 2 of the most common substances around. High supply, low value. Difficult to make a money out of that.

For example, some people propose that we throw away the antiquated notion that women have "entered" the work force and that this must be accounted for: they ARE HERE, they going to stay in the work force, and the only question is how to structure an economy that has room for them (so they say). I think that this proposal assumes that we want most women to stay in the work force, and I am not willing to assume that for the sake of the discussion, even though I may end up there when we finally get to pragmatic and practical approaches. Has anyone bothered to work out the economic costs of (a) paying someone else to do day care, (b) the costs of mental and emotional ill health from disturbed family structure, (c) child delinquency and resultant net loss from high-school sludges who cannot work in a real job and have to be carried by society; (d) the increased costs of marriages broken up because the stresses on marriage from 2-worker families, etc? Just on economic terms, it may be that the 2-worker family isn't really benefiting society much.

It's really not hard to demonstrate individually to most families that it's a pointless endeavor. A relative of mine did it for several men in his office and they were shocked to find that their wives earned on average only a few hundred dollars a month in take home pay after the costs of day care, commuting and eating out more (caused by both spouses being too exhausted to cook). In metropolitan DC, it would conservatively take about $30k/year just for a wife to start earning more money for the family than they spend on expenses related to her driving. Most metropolitan areas are likely pretty close to that or even higher (in California in particular).

Part of this should be a moral dimension. When middle class women who don't need jobs work for selfish reasons like a bigger house or to find fulfillment (unless the woman has a true productive gift, one might argue) they put pressure on the wages of working class women. Working class women have, the 1950s moment aside, never really had the security of an economic environment in which they could rely on their husbands completely for their family's security. It's not fair to them to be put into a more desperate situation because someone needs to find happiness outside the household. Liberals may find that offensive, but if you are going to argue about the interests of society, then society's interests are clearly aligned with the economic security of the poor and working class, not the happiness of middle class women.

Likewise, I am willing to consider conceptual scenarios that include prices of some commodities going up by large factors, but I am more interested in the mechanisms by which we determine the "necessary" steps that result in this really are necessary to that end goal of X. Surely tort reform would end up reducing costs of many goods and services, not increasing them. But I think it needs doing not primarily because its impact on pricing, but because of the negative effect the tort muddle has on human creativity and productivity. (By the way, along with fixing the medical schools we would have to fix the law schools to achieve the right _kind_ of tort reform, because half the problem is lawyers and judges with the wrong attitude about law and order.)

The other half is that we need to amend the constitution to break the judiciary's power over the economy and political system. I would propose that conservatives who value the power of the jury advocate something like this, as I think it would solve most of our problems:

The authority of the courts of the United States to render judgment upon the legality of any law passed by the Congress shall be limited to issuing an order compelling Congress to convene, consider the law in open debate recorded for the public record and then pass a resolution in both houses declaring whether it shall stand or be removed from the laws of the United States. If the Congress fails to convene within 30 days, and there exists no exigent circumstance preventing their assembly, it shall be removed from the laws of the United States automatically.

It shall stand as a matter of legal fact without exception that no law or order given contrary to this constitution shall confer any authority upon the agents of the United States or the several states to undertake any action under the color of authority. The right to resist unlawful authority shall be enjoyed by all individuals residing within the United States. No jury shall be compelled to give deference to the opinion of the court or any executive authority in determining the factual guilt or innocence of the defendant or the compatibility of the laws they are accused of violating with this constitution. In any trial by jury where the jury declares that it finds the laws which the defendant is accused of violating to be incompatible with this constitution, the opinion of the jury shall not be overturned unless it can be demonstrated beyond a reasonable doubt that the jury was subjected to coercion or bribery.

Right. If someone proved that gold were the cause of cancer, then gold value would plummet to near 0.

Which is why nobody proposes a Plutonium monetary standard, even though Plutonium is exceedingly rare and valuable.

Nobody thinks gold is a magical substance. There are plenty of reasons for making it the foundation of a medium of exchange, and its relative rarity, the fact that it doesn't rust, and various others, are among those. Obviously, _if_ it caused cancer, this wouldn't just be a matter of human psychology but a relevant matter of fact. It doesn't, so that doesn't matter.

Certainly, if people do not value a commodity there is no point in making linking a medium of exchange to it. And if it is incredibly common, it doesn't work well for that purpose either. My position has always been, however, that it is economic folly to have the supply of our medium of exchange linked to _nothing_ but the bare will of some official, able to be varied at will. What's amazing is that we see so many effects that are obviously tied to this, so many aspects of conversations that have relevance to it, yet such odd and frivolous objections (oh, well, everything is related to human psychology anyway, and people do mine precious metals, and why not toenail clippers, etc.) are allowed to have weight. I'm not saying that _every_ objection is frivolous, but those surely are.

What's amazing is that we see so many effects that are obviously tied to this, so many aspects of conversations that have relevance to it, yet such odd and frivolous objections (oh, well, everything is related to human psychology anyway, and people do mine precious metals, and why not toenail clippers, etc.) are allowed to have weight.

People have their pet theories and prejudices. They won't let the facts get in the way of their mental models which show that with the right conditions (all of which they've put into place in their mental models) it doesn't have to have the logical outcome that in reality it will have. Free traders do this with land prices. They simply ignore them. Then when the quality of life plummets, they blame everyone else other than themselves when it is pointed out to them that they planned their theory and argument as well as an architect in tornado alley who found planning for inclement weather to be a bore.

My position has always been, however, that it is economic folly to have the supply of our medium of exchange linked to _nothing_ but the bare will of some official, able to be varied at will.

Lydia, that's just not an accurate description of the situation. "Bare will of some official"? You think investors hold dollar assets out of some supreme trust in Ben Bernanke?

People value dollars because, despite recent unpleasantness, they regard the US as the most stable and prosperous economy on earth, and thus dollar assets as, on balance, better than any other sort of asset. Far from being the emanation of someone's bare will, the value of the dollar lies in the productivity of American labor, the profitability of her businesses, the reliability of her tax base, the security of private property under her law, and numerous related factors.

The concern that so many of us have is that these strengths may prove evanescent. Numerous pressures are undermining them.

In my considered judgment of the circumstances we face, a policy of pegging the dollar to gold (or another precious metal for that matter) would only exaggerate the misery that deflation is inflicting on the country. Moreover, to abruptly remove or drastically truncate the Federal Reserve's power as lender of last resort would be a catastrophic error. The economy we have now, with its dependence on various methods of debt-finance and the complexities of capital markets, requires the institutional role of a central bank with authority to lend when no one else will. Reforms designed to reduce the power of the Fed are only plausible after successful reforms to restore healthy capital markets, in other words, to restore the proper balance between free enterprise and finance capitalism.

You think investors hold dollar assets out of some supreme trust in Ben Bernanke?

No, I didn't say that. I spoke of the supply of the medium of exchange. That the money supply can be increased by officials' decision is of the essence of a pure fiat money system. That the value of the medium of exchange is related to its supply is undeniable. Of course perception of the strength of America, etc., also contributes to that value. But if supply had nothing to do with it, then there would be no point in having a group of people around deciding at times to increase the supply and endowed with the power to do so.

supply of our medium of exchange linked to _nothing_ but the bare will of some official

You very much said that supply depends on the will or whim or officials, but upthread we discussed at length how the economic decisions of millions of individual actors affect it as well. Deleveraging, refis, savings, stuffing currency in mattresses -- these all effectively reduce the supply of money. The persistence of a deflationary environment, right in the teeth of enormous and unprecedented monetary easing by the central bank, demonstrates impossibility of money supply being dependent entirely on official policy.

The persistence of a deflationary environment, right in the teeth of enormous and unprecedented monetary easing by the central bank, demonstrates impossibility of money supply being dependent entirely on official policy.

You know, Paul, you keep saying this kind of thing, and I just think we're at an impasse. You think it more important that people are keeping stuff in their mattresses or (more likely) FDIC-insured liquid accounts rather than investing it. You call that their "limiting the supply." I consider that to be very nearly a play on words. The money exists. It's there. In the very nature of the case, it is being put somewhere that people can get ready access to it. In fact, that's why people are doing the things you're concerned about _instead_ of investing it--because they're nervous and want their money easily available. To say therefore that it literally isn't part of the present money supply, as though it doesn't exist, simply because it isn't being invested (or isn't being invested in stocks or whatever--after all, if it's even in an FDIC-insured Money Market account it _is_ being invested to some extent), just seems to me to be highly misguided. It's precisely because it does exist, is a part of the present money supply, and can be accessed readily by people--to whom it was originally made available by the will of an official who chose to increase the money supply--that you yourself are worried about what would happen if all those dollars came roaring back into _more_ active circulation.

We just disagree here about how a term like "money supply" should be used to pick out relevant economic properties. You evidently think only those things should be included that are invested in some particular way--that are as you deem "entering the economy in active trading," which evidently doesn't even include liquid bank accounts being held by nervous economic actors, or money paid to a bank in early repayment of a debt (!) if I'm understanding you correctly. (You refer to the latter money as "being extinguished," even though, of course, it's being turned over to the lender in repayment of the debt, and the lender can then do whatever with it.)

I'm aware that there are various ways that the money supply can be calculated (I seem to recall going through about four of them when I was boning up on this a few years ago), but as far as I can tell, yours isn't even one of them!

Money supply in the modern digital finance is an exceedingly complex subject. We all know that. What I objected to is the absolutist language you used -- money supply being dependent "nothing but" the will of the official. Baloney.

The fact that money exists does not mean it is circulating. Any number of us can tell stories about discovering large wads of cash in the closet of some relative recently deceased. After the probate court clears it to the inheritor, a portion of that cash (presumably) will return to circulation, thus introducing a infinitesimal inflationary effect quite independent of the central bank. It's silly to think of every dollar ever printed (or conjured in digital "space") as constantly circulating. It puts us back in the neighborhood of the idea that the gold supply is fixed.

Paul, if your complaint were really *only* about dollars being buried in the ground (or in a closet) somewhere and literally forgotten for many years, I would be a bit more sympathetic.

Your comments throughout make it quite clear that you are treating money as "extinguished" or "not in circulation" when these are, at best, metaphors for the money's not being used and circulated as aggressively as it could be. When you start saying that dollars are "extinguished" because someone paid off his mortgage early and that this is part of the cause of our "deflationary state," when you use early payment of debt and people's keeping their money in safe, relatively or wholly liquid accounts or as short-term assets as counterexamples to the claim that the money supply in a country with a fiat currency is controlled by those who decide how much currency to create--let's just say that my willingness to grant force to your concepts of "money supply" and "deflation" and to your position on the causes of changes in these becomes severely strained.

Your comments throughout make it quite clear that you are treating money as "extinguished" or "not in circulation" when these are, at best, metaphors for the money's not being used and circulated as aggressively as it could be.

When you pay off debt early, what is going on is that you are giving the bank currency when what it wants is a security representing a revenue stream. Instead of a claim on your income, the bank gets a pile of cash. Some of this cash may be used to replenish the vault or settle daily cash transactions, but supposing we're talking about a debt of some size, most of the cash will end up on reserve at the Federal Reserve. Now banks just like individuals can get nervous about investment and start holding extra cash -- extra reserves. And indeed we have seen sizable expansions in bank reserves during the various waves of this financial crisis. The point is that this cautious behavior, by individuals and businesses, in aggregate, reduces the circulation of currency, whatever its form. This is deflationary. The Fed can add digits to the reserves, or throw dollar bills from helicopters, but it can't make them circulate. In a perfectly deflationary environment, I suppose, every last dollar off of every last chopper will be carried off and stuffed into a mattress.

When you pay off debt early, what is going on is that you are giving the bank currency when what it wants is a security representing a revenue stream.

The bank shouldn't care. If it did care, it should write the loan contract with a pre-payment penalty, which is a perfectly valid economic measure of caring whether they get the cash back or retain a promise of future revenue. The fact that it failed to include a pre-payment penalty should be an indicator that they thought it was, practically, irrelevant. I suppose that they might have thought this in a former economic environment when it was easy to lend out money so they had full expectation of turning it around. Now that that economic environment no longer obtains, are they writing their loans with more pre-payment penalties? Heck no. What does that say?

Some of this cash may be used to replenish the vault or settle daily cash transactions, but supposing we're talking about a debt of some size, most of the cash will end up on reserve at the Federal Reserve.

If the banks are going to do irrational things, then there is no way we are going to "explain" their behavior economically. If the bank's lendees are doing a lot of early repayment, then the effective demand for debt drops, and the interest rate has to drop, which should automatically make viable some new entrepreneurial ventures that were not _quite_ viable at a higher interest rate. That's where the bank's money should be going. If it isn't, then it's because of other factors, like people being irrational (or bad regulatory environment).

Now banks just like individuals can get nervous about investment and start holding extra cash -- extra reserves.

If you mean banks that are returning to a more rational ratio of theoretical holdings to reserves than the late fractional reserve standard, fine. If you mean that the banks are going even further than that and holding on to cash irrationally, and forgetting what it means to be a bank, then there's not much help for it, is there?

The point is that this cautious behavior, by individuals and businesses, in aggregate, reduces the circulation of currency, whatever its form. This is deflationary.

I haven't a clue how economists measure "circulation", but let's suppose for a moment that all transactions are in cash dollars, and you spend a month following a specific dollar bill around. In a "high circulation" environment the dollar bill changes hands 20 times in the month, in a low circulation state it changes hands twice (and of course there are intermediate values). I fail to see why reducing the number of times it changes hands from 20 to 15, or to 5, is intrinsically deflationary.

As Lydia says, whether the bill passes through 20 wallets or only 2 wallets in the month, it is "in circulation" in some real sense, because it is sitting ready to be used in the mind of the owner when he sees something he values more than he values the dollar bill. Or, to put it on the other side of the coin, if it takes 1 minute to actually "pass" the dollar bill in a transaction, the dollar bill is sitting idle 1060 minutes of the month in the high circulation system, and it is sitting idle 1078 minutes in the low circulation system. That's pretty insignificant difference, isn't it?

Taking a bill out of circulation happens if you (a) destroy the bill, or (b) make it impossible (or virtually so) to be used, so that nobody thinks of it as "I can go get it and use it if I find something more valuable than it is." As long as people think of it as available, it is in circulation even if in LOW circulation.

Now, if instead of following a physical dollar bill that represents already made actual wealth changing hands, (the TV, the hamburger, the new faucet) we take a month to follow around a "notional" dollar created out of thin air by fractional reserves and the like, yes, reducing the frequency of transfers of THAT sort of dollar may be deflationary. But then, I think the problem lies at least as much in the notional and, (sometimes if not always) fictitious or only probable nature of the wealth it represents as in the refusal to "pass it on". If I "give" the bank a promise of 30% of next month's salary payment, and the bank uses that promise to "buy" a mortgage-backed security, and the broker uses the promise to "buy" a portion of next year's wheat crop, all of those transactions are about "wealth" that does not yet exist, wealth that is only in potentia, not about wealth that is here and now real. Such potency of wealth should not be considered wealth in the same terms and in the same way as actual wealth.

I don't know how we change from our irrational financial system to a rational one. I don't know the full dangers of deflation on a system. I certainly don't understand how banking works, or "works" since it clearly doesn't quite work. The fact that the experts don't either ought to make us pause, shouldn't it?

When you pay off debt early, what is going on is that you are giving the bank currency when what it wants is a security representing a revenue stream. Instead of a claim on your income, the bank gets a pile of cash.

Paul, I'm sorry, but that just doesn't mean that the dollars "aren't in circulation" in the same sense that they "aren't in circulation" if they are burned or even, if you want an intermediate case, if they are hoarded in some unadvertised and non-interest-bearing location by a person who gets real forgetful-like and doesn't remember that he has them and they don't get discovered until he dies.

I believe the relevant term here may be "velocity." You seem to be treating money supply as somehow definitionally tied to monetary velocity. That just doesn't sound correct, as per Tony's comments above.

Early repayment was actually a major problem in the construction of the mortgage-backed security market. The securities are dependent on the steady revenue streams for their structure; the bankers who put these things together very much want a revenue stream and not a pile of cash.

One of the "solutions" to this problem was the device of "tranching." Investors could chose the seniority of their claim on the MBS payments. You could pay more to gain the senior tranche, thereby minimizing the risk of prepayment; or you could pay less and run that risk with a lower tranche. This also gave rise to the old "sugar sprinkled over rotten fruit" trick: pile up a mass of lousy mortgages but throw in a handful of very good ones, and pretend the whole confection is investment grade because you can still sell the senior tranche.

Tony, I'm generally of the view that our banking system has succumbed to irrationality, particularly, as you indicate, when it comes to the abstraction of future wealth that dominates so much of securities markets.

Lydia, you do realize that in a fractional-reserve system like ours, it is not just the central bank but also commercial banks that have the ability to create money?

Paul, I also understand that reserve requirements (by the government) limit the expansion of the money supply by relending and that this and other interactions among interest rates, relending, etc. are taken into account by the fed in its decisions on central money creation.

This, however, doesn't mean that if banks voluntarily increase their reserves of what Tony helpfully calls "non-notional" dollars, those "non-notional" dollars disappear and should be counted as having ceased to exist.

Good question. My understanding is that when a commercial bank puts cash on reserve with the Fed the physical currency does go away because bank reserves are purely digital. Otherwise how could overnight Fed funds transactions occur? They're not driving armored cars with physical currency around; they're shifting quantities on digital accounts.

By the way, the term "notional" is frequently used in derivatives markets, and it refers to the value of the underlying assets to which the derivatives refer. So let's say an investor purchases protection through credit default swaps on $10 million in bank debt. That $10 million in debt is referred to as "notional." But the notional value of that debt need not correspondent at all with actual outstanding debt. Anyone able to find a seller can purchase new CDS on the same debt, thus expanding the notional outstanding debt with each transaction. Back in 2007-08 AIG's London office was precisely that seller, willing to write new CDS contracts for anyone.

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